The future is bright, the future is Elecosoft . Or that's how I interpret this morning's 'better than expected' trading update from Buildtech project management and visualisation software developer Elecosoft (ELCO) .
Indeed, the company has reached a major inflection point. You see, over the past 2 years it has been rapidly transitioning to a SaaS/recurring revenue model, which has artificially depressed results.
That said, the vast majority of the heavy lifting has now been done with ARR as percentage of turnover climbing from 56% in 2021 to 72% in H1'23 to almost 76% in H2'23.
Hence, from previously acting as a drag on the numbers, the switch to SaaS should instead provide a future tailwind - in turn enabling the top line to expand at a 13%-15% pa clip over the next 2 years, alongside delivering 20%+ EPS growth and strong cashflows given the attractive 89% gross margins.
All told, FY'23 profits came in ahead of consensus (est adjusted PBT £3.5m-£3.9m) on 'in line' sales of £28.0m (£26.6m in FY'22). ARR was up 24% to a record £22.6m - reflecting overseas expansion (including US), new client wins, high retention rates and the £4m BestOutcome acquisition in June.
Equally, net cash closed Dec'23 at a healthy £10.9m (13p/share), up from £9.4m in June, providing ample firepower to execute further synergistic deals.
Looking ahead, Singer Capital Markets have pencilled in FY24 revenues, adjusted EBITDA and EPS of £31.9, £7.1m and 4.2p respectively - thus putting the stock at 87p, on modest multiples of 2.0x EV/sales (vs 5x sector), 8.8x EV/EBITDA (15x-20x), 20.7x PER and 1.0x PEG.
Interestingly too, I suspect Elecosoft may even ultimately attract predatory interest from either a trade buyer (e.g. Bentley, Autodesk, Nemetschek) or a PE house. Here I have a conservative 127p/share fair value for the stock, with Cavendish at 160p and Singer Capital Markets on 110p.
CEO Jonathan Hunter commenting: "Despite challenging macroeconomic climates & geopolitical uncertainties, Elecosoft has continued to deliver a robust performance with its underlying revenue growth, and profitability is expected to be ahead of consensus. This reflects our strategic switch to a SaaS model, our focus on higher margin core products, and the discontinuation of products that were not contributing to the future of the Group."
"Elecosoft continues its expansion in the US, introducing a direct sales approach, having attracted in excess of 40 new direct customers following focused investment on sales and marketing."
"We are confident of another year of strong organic growth, supplemented by further acquisitions, to widen our international reach and customer-focused capabilities."
Shares moved 7.7% higher on today's release.
Follow News & Updates from Elecosoft: